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Partnership Seeks Reversal of Decision in Easement Deduction Case

JUN. 15, 2021

Glade Creek Partners LLC et al. v. Commissioner

DATED JUN. 15, 2021
DOCUMENT ATTRIBUTES

Glade Creek Partners LLC et al. v. Commissioner

GLADE CREEK PARTNERS, LLC,
SEQUATCHIE HOLDINGS, LLC TAX MATTERS PARTNER,
Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee.

United States Court of Appeals 
for the 
Eleventh Circuit

APPEAL FROM THE UNITED STATES TAX COURT

(Hon. Joseph Robert Goeke)

INITIAL BRIEF OF APPELLANT

GREGORY P. RHODES
SIDNEY W. JACKSON, IV
Dentons Sirote PC
2311 Highland Avenue South
Birmingham, AL 35205
T: (205) 930-5445

MICHELLE ABROMS LEVIN
LOGAN C. ABERNATHY
SARAH E. GREEN
Dentons Sirote PC
305 Church Street SW, Ste 800
Huntsville, AL 35804
T: (256) 518-3605

Attorneys for Appellant.

CERTIFICATE OF INTERESTED PERSONS

Pursuant to 11th Circuit R. 26.1-1, 26.1-3, and 27-1, it is hereby certified that the following persons and entities have an interest in the outcome of this case or have participated as attorneys or judges in the adjudication of this case:

Abernathy, Logan C., Attorney for Petitioner-Appellant 

Bringer, Norah E., Lead Counsel, U.S. Department of Justice, Appellee

Cleverdon, Edwin B., Senior Attorney, Internal Revenue Service

Crump, Horace, Associate Area Counsel, Internal Revenue Service

Desmond, Michael J., Chief Counsel, Internal Revenue Service

Dillard, Robert, Internal Revenue Service, Associate Area Counsel

Glade Creek Partners, LLC, Petitioner-Appellant 

Goeke, Joseph Robert, Judge, United State Tax Court

Jackson, Sidney W., IV, Attorney for Petitioner-Appellant 

Kiessling, William Walter, Internal Revenue Service, Associate Area Counsel

Levin, Michelle Abroms, Attorney for Petitioner-Appellant

Levitt, Ronald A., Attorney for Petitioner-Appellant 

Martin, Amber B., Internal Revenue Service, Senior Attorney

McClendon, William Benjamin, Internal Revenue Service, Attorney

McNeely, Bruce, Internal Revenue Service, Division Counsel 

Paul, William M., Internal Revenue Service, Acting Chief Counsel

Pitts, Dustin J., Internal Revenue Service, Attorney 

Rhodes, Gregory P., Lead Counsel for Petitioner-Appellant

Sequatchie Holdings, LLC, Petitioner-Appellant 

Spires, Joseph W., Internal Revenue Service, Division Counsel

Wooldridge, David M., Attorney for Petitioner-Appellant

STATEMENT REGARDING ORAL ARGUMENT

Appellant donated a conservation easement over 1,312 acres of pristine, imminently-developable property (the “Conservation Easement”) that the Internal Revenue Service (“IRS”) conceded was worthy of protection, and the Tax Court determined was worth millions of dollars. Yet the IRS, and ultimately the Tax Court, denied Appellant's deduction based on the IRS's new interpretation of its own regulation. The Tax Court's determination, if sustained, will deny deductions that Congress intended to grant to thousands of charitable donors, including many in this judicial circuit. Moreover, the Tax Court's refusal to enforce the APA's requirements will give the IRS free rein to create regulatory requirements without consideration of, or response to, comments from significant stakeholders.

The IRS also penalized Appellant for its donation. In an attempt to meet its burden of establishing the applicability of valuation misstatement penalties, the IRS presented three inconsistent valuations. After the three positions were abandoned or dismissed, the IRS was left with no evidence to satisfy its burden of establishing that the Conservation Easement's value was less than claimed by Glade Creek Partners, LLC (“Glade”). Yet the Tax Court determined that Glade was liable for a substantial valuation misstatement penalty. The methodology and standards applied by the Tax Court, if sustained, will allow the IRS to effectively shift the burden to taxpayers to prove that they are not liable for penalties, even when the IRS has submitted no evidence of an easement's value.


TABLE OF CONTENTS

CERTIFICATE OF INTERESTED PERSONS

STATEMENT REGARDING ORAL ARGUMENT

TABLE OF CONTENTS

TABLE OF AUTHORITIES

STATEMENT OF JURISDICTION

STATEMENT OF THE ISSUES

STATEMENT OF THE CASE

I. Procedural History

II. Facts

A. Qualified Conservation Contribution Statutory History

B. Treasury's Promulgation of Regulations

C. Absence of IRS Guidance and Taxpayer Reliance

D. History of the Glade Property

E. Donation of Conservation Easement on Tracts II and III

F. The IRS Challenges Glade's Charitable Deduction

STANDARD OF REVIEW

I. Standard of Review Applicable to Tax Court Decision

A. The Tax Court's Charitable Contribution Determination

B. The Tax Court's Penalty Determination

SUMMARY OF ARGUMENT

ARGUMENT

I. The IRS Has Not Met Its Burden of Establishing Glade Is Liable for a Substantial Valuation Misstatement Penalty

A. The Record Does Not Support Respondent's Three Inconsistent Value Positions

B. The Tax Court Erred by Concocting Sua Sponte a Valuation Method Unsupported by the Record and Advanced by Neither Party

C. The Tax Court Erred by Determining that Glade Did Not Satisfy the Requirements of I.R.C. § 6664(c)(3)(B)

II. The Proceeds Regulation Is Invalid Because Treasury Failed to Comply with the APA's Procedural Requirements

A. The Basis and Purpose Statement Fails to Explain the Proceeds Regulation or Respond to Relevant, Significant Comments

III. The Government's Interpretation of the Proceeds Regulation Renders the Regulation Invalid Under Chevron

A. The Proceeds Regulation Exceeds Treasury's Authority when Congress Declined to Impose Such a Requirement

B. The Proceeds Regulation Is Arbitrary and Capricious

C. Properly Interpreted, the Proceeds Regulation Does Not Require Any Allocation of Extinguishment Proceeds Attributable to Post-Donation Improvements

CONCLUSION

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE

TABLE OF AUTHORITIES

Federal Cases

Atkinson v. Comm'r, 110 T.C.M. (CCH) 550 (2015)

BC Ranch II, L.P. v. Comm'r, 867 F.3d 547 (5th Cir. 2017)

Butler v. Comm'r, 103 T.C.M. (CCH) 1359 (2012)

Caracci v. Comm'r, 456 F.3d 444 (5th Cir. 2006)

Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984)

CIC Servs., LLC v. Comm'r, 936 F.3d 501 (6th Cir. 2019)3

Estate of Elkins v. Comm'r, 767 F.3d 443 (5th Cir. 2014)

Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117 (2016)

Hamdan v. Rumsfeld, 548 U.S. 557 (2006)

Harden v. Comm'r, 223 F.2d 418 (10th Cir. 1955)

Herbel v. Comm'r, 129 F.3d 788 (5th Cir. 1997)

Hewitt v. Comm'r, No. 20-13700 (11th Cir. filed Sept. 15, 2020)

Home Box Office, Inc. v. F.C.C., 567 F.2d 9 (D.C. Cir. 1977)

Estate of Jelke v. Comm'r, 507 F.3d 1317 (11th Cir. 2007)

JPMorgan Chase & Co. v. Comm'r, 458 F.3d 564 (7th Cir. 2006)

Judulang v. Holder, 565 U.S. 42 (2011)

Kiva Dunes Conservation, LLC v. Comm'r, 97 T.C.M. (CCH) 1818 (2009)

Lloyd Noland Hosp. & Clinic v. Heckler, 762 F.2d 1561, 1566 (11th Cir. 1985)

Martin v. Soc. Sec. Admin., 903 F.3d 1154 (11th Cir. 2018)

Mayo Found. for Med. Educ. & Research. v. United States, 562 U.S. 44, 53 (2011)

Motor Vehicle Mfr. Ass'n of the U.S. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983)

Nat'l Mining Ass'n v. U.S. Dep't of Labor, 812 F.3d 843, 865 n.23 (11th Cir.)

Oakbrook Land Holdings, LLC v. Comm'r, 154 T.C. 180, 235 (2020)

Ocmulgee Fields, Inc. v. Comm'r, 613 F.3d 1360 (11th Cir. 2010)

Palmer Ranch Holdings, Ltd. v. Comm'r, 812 F.3d 982 (11th Cir. 2016)

PBBM-Rose Hill, Ltd. v. Comm'r, No. 026096-14 (T.C. Oct. 11, 2016)

Pine Mountain Preserve, LLLP v. Comm'r, 978 F.3d 1200 (11th Cir. 2020)

Port of Jacksonville Mar. Ad Hoc Comm., Inc. v. U.S. Coast Guard, 788 F.2d 705 (11th Cir. 1986)

Succession of McCord v. Comm'r, 461 F.3d 614, 626 (5th Cir. 2006)

United States v. Nova Scotia Food Prod. Corp., 568 F.2d 240, 253 (2nd Cir. 1977)

Whitehouse Hotel Ltd. P'ship v. Comm'r, 755 F.3d 236 (5th Cir. 2014)

Federal Statutes

5 U.S.C. § 553

5 U.S.C. § 553(a)

5 U.S.C. § 553(c)

I.R.C. § 170

I.R.C. § 170(h)

I.R.C. § 6214

I.R.C. § 6664(c)(1)

I.R.C. § 6664(c)(3)

I.R.C. § 6664(c)(3)(B)

I.R.C. § 7482(a)(1)

I.R.C. § 7482(b)

I.R.C. § 7491(a)(1)

I.R.C. § 7491(c)

Regulatory Materials

I.R.S. Priv. Ltr. Rul. 2008-36-014, 2008 WL 4102748 (Sept. 5, 2008)

Income Taxes; Qualified Conservation Contributions, 51 Fed. Reg. at 1496-98 (Jan. 14 1986) (to be codified at 26 C.F.R. pt. 1); T.D. 8069, 1986-1 C.B. 8951

Qualified Conservation Contribution; Proposed Rulemaking, 48 Fed. Reg. 22940 (May 23, 1983) (to be codified at 26 C.F.R. pt 1)

Treas. Reg. § 1.170A-14(g)(6)

Treas. Reg. § 1.170A-14(g)(6)(ii)

Treas. Reg. § 1.170A-14(h)(i)

Other Authorities

Brief for Appellant, Hewitt v. Comm'r, No. 20-13700 (11th Cir. filed Jan. 28, 2021), 2021 WL 346581

Brief for Land Trust Alliance, Inc. et al. as Amici Curiae Supporting Appellant, PBBM-Rose Hill, Ltd. v. Comm'r, 900 F.3d 193 (No. 17-60276), 2018 WL 5087506

Elizabeth Byers & Karin Marchetti Ponte, Conservation Easement Handbook (2d ed. 2005).

Minor Tax Bills: Hearings Before the Subcomm. on Select Revenue Measures of the House Comm. on Ways and Means, 96th Cong. 223 (1980)

Nancy Ortmeyer Kuhn, The Eleventh Circuit Court of Appeals: The Current Focus for Conservation Easements, Bloomberg Tax (Apr. 1, 2021)

Reply Brief for Appellant, Hewitt v. Comm'r, No. 20-13700 (11th Cir. filed Apr. 22, 2021), 2021 WL 1630584

S. Rep. No. 96-1007 (1980), as reprinted in 1980 U.S.C.C.A.N. 6736

Staff of J. Comm. on Taxation, 96th Cong., Description of Miscellaneous Tax Bills Scheduled for a Hearing Before the Subcommittee on Select Revenue Measures of the Committee on Ways and Means on June 26, 1980 (Comm. Print 1980)

Tax Treatment Extension Act of 1980, Pub. L. No. 96-541, § 6(b), 94 Stat. 3204 (1980) 


STATEMENT OF JURISDICTION

This is an appeal of the January 22, 2021 final decision of the United States Tax Court, which determined that Appellant was not entitled to a deduction for the donation of a conservation easement (the “Conservation Easement” or “Easement”) and that Appellant was liable for a substantial valuation misstatement penalty. The Tax Court had jurisdiction pursuant to I.R.C. § 62141. This Court has jurisdiction to review Tax Court decisions pursuant to I.R.C. § 7482(a)(1). Venue for this appeal is proper in the Eleventh Circuit under I.R.C. § 7482(b) because Georgia was the principal place of business of the Tax Matters Partner and Glade at the time the petition was filed in the Tax Court.

STATEMENT OF THE ISSUES

The IRS has made the audit of conservation easement donations a priority. Presently, the IRS is focused on those donations that fit into the broad category of so-named “syndicated conservation easement” donations. The IRS's universal skepticism of such transactions has caused the agency to disregard the facts relevant to individual cases. Consequently, the IRS frequently denies deductions for unspecified reasons and asserts every conceivable penalty in all such transactions, regardless of the relevant facts. Lost in this process is an effort to reach a fair result when merited by the facts.

The IRS's process has given rise to the present appeal. The IRS issued a Final Partnership Administrative Adjustment (“FPAA”) fully disallowing a conservation easement donation by Glade over 1,312 acres of pristine, undisturbed, imminently-developable real estate on the Cumberland Plateau by vaguely asserting that “it has not been established that the claimed deduction meets all the requirements of Internal Revenue Code Section 170.” The IRS asserted, in the alternative, that the 1,312-acre Conservation Easement donation had no value, somehow. The IRS also asserted a 40% gross valuation misstatement penalty and alternatively, various 20% penalties. The alternative penalties included penalties for negligent non-compliance with requirements under I.R.C. § 170 that Glade allegedly failed to satisfy.

As Glade's case progressed through litigation, the IRS succeeded in other cases by changing its long-held interpretation of Treasury Regulation 1.170A-14(g)(6) (the “Proceeds Regulation” or “Regulation”) to argue that certain standard, formerly condoned language in conservation easement deeds failed to comply with the “Proceeds Regulation.” So, even though the IRS had not invented this argument when it audited Glade, the IRS adopted it as the primary basis for disallowing Glade's deduction. The Tax Court, bound by its prior decision in Oakbrook Land Holdings, LLC v. Comm'r, applied that law to this case to disallow the deduction. 154 T.C. 180 (2020).

As a result, the Conservation Easement's value became moot in regards to the charitable deduction. However, the valuation penalties asserted against Glade require a valuation determination (i.e., the IRS must establish that Glade undervalued the Easement). Initially, the IRS arbitrarily determined that the Easement had zero value. The IRS's expert at trial, Mr. Benjamin Broome, could not support the arbitrary zero value but presented an absurd position that the Conservation Easement's value was only $630,000. However, the Tax Court completely rejected and dismissed this expert's opinion — the IRS's only valuation witness.

After trial, the IRS pivoted. It requested the Tax Court exclude Broome's testimony entirely and asserted a third valuation theory: that the Conservation Easement was worth $3,063,161. The Tax Court also rejected this theory as inconsistent with the factual evidence.

At that point, the valuation question should have been resolved in Glade's favor. The IRS had the burden of establishing that Glade was liable for a substantial valuation misstatement penalty. Yet, the IRS had no evidence to carry its burden. The Tax Court erred by determining otherwise.

Moreover, the Tax Court agreed with Glade's experts, Claud Clark and Richard Norton, that the highest and best use of the easement property was for second-home development. In the absence of evidence supporting a different value, the Tax Court erred by not adopting Glade's expert's value. And, to the extent the Tax Court was justified in adjusting Glade's valuation, it erred by applying adjustments unsupported by the record.

The Tax Court also erred by rejecting Glade's reasonable cause for adopting its appraiser's value on its tax return. Glade reasonably relied in good faith on a qualified appraisal by a qualified appraiser. The IRS conceded that Glade's appraiser and appraisal were “qualified.” Glade's manager investigated and relied on the appraisal in good faith. The Tax Court's determination is unsupported by the record.

Issue 1: Did the Tax Court err by adopting the IRS's new, result-oriented, interpretation of Treasury regulation § 1.170A-14(g)(6) when such interpretation is contrary to the most reasonable reading of the Regulation, contrary to the IRS's prior interpretation, and contrary to the rights Congress contemplated taxpayers would retain?2

Issue 2: Did the Tax Court err in concluding that Treasury complied with the Administrative Procedure Act, 5 U.S.C. § 553(a), in promulgating Treasury regulation § 1.170A-14(g)(6) when the Administrative Record3 demonstrates that: (1) many commenters raised issues with the proposed regulation, including the specific issue in this case of how to allocate extinguishment proceeds attributable to improvements; and (2) Treasury failed to respond to or even address any of those concerns in the basis and purpose statement accompanying the final Regulation?

Issue 3: Did the Tax Court err in concluding that Treasury regulation § 1.170A-14(g)(6) is not arbitrary and capricious when Treasury offered no explanation for its decision and when the Regulation requires that the donor relinquish proceeds attributable to rights it is permitted to retain under the statute?

Issue 4: Did the Tax Court err by deviating from Glade's expert valuation determination and determining a substantial valuation misstatement penalty against Glade when the IRS, which had the burden on the issue, produced no credible evidence to support a different value?

Issue 5: Did the Tax Court err by adjusting Glade's expert's valuation when such adjustments were unsupported by the record?

Issue 6: If the Tax Court was justified in departing from Glade's valuation, was it justified in ignoring uncontradicted evidence that Glade relied in good faith upon a qualified appraisal by a qualified appraiser when claiming the Conservation Easement deduction?

STATEMENT OF THE CASE

I. Procedural History

The Tax Court issued the opinion in this case on November 2, 2020. Glade Creek Partners, LLC v. Comm'r, No. 120 T.C.M. (CCH) 285 (T.C. 2020) (“Opinion” or “Op.”).

II. Facts

A. Qualified Conservation Contribution Statutory History

In 1980, Congress enacted legislation to encourage the conservation of natural resources and wildlife. This legislation became I.R.C. § 170(h). Tax Treatment Extension Act of 1980, Pub. L. No. 96-541, § 6(b), 94 Stat. 3204, 3206 (1980).

The Committee believes that the preservation of our country's natural resources and cultural heritage is important, and the committee recognizes that conservation easements now play an important role in preservation efforts.

S. Rep. No. 96-1007, at 9 (1980), as reprinted in 1980 U.S.C.C.A.N. 6736, 6744. In so doing, “the Committee found it appropriate to expand the types of transfers that will qualify as deductible contributions” to include “easements and other interests in real property that under state property laws have similar attributes (e.g., a restrictive covenant).” S. Rep. No. 96-1007 at 9-10.

When extending the charitable contribution deduction to conservation easements, Congress noted that it “expects that regulations under this section will be classified among those regulation projects having the highest priority” so that “potential donors [will] be secure in their knowledge that a contemplated contribution will qualify for a deduction.” Id. at 13. Forty years later, donors are less confident than ever that their contribution will qualify.

B. Treasury's Promulgation of Regulations

On May 23, 1983, the IRS issued a notice proposing regulations to clarify § 170(h)'s statutory rules. Qualified Conservation Contribution; Proposed Rulemaking, 48 Fed. Reg. 22940 (proposed May 23, 1983) (to be codified at 26 C.F.R. pt. 1). In response, Treasury received “approximately 90 comments regarding the substance of the proposed section 170A regulation.” Oakbrook, 154 T.C. at 235 (Holmes, J., dissenting). Of those ninety comments, thirteen directly addressed the proposed regulation that became Treasury regulation § 1.170A-14(g)(6)(ii). Id. “The question of how to treat donor improvements undertaken after the grant of the easement in the event the property was subsequently sold was put squarely before Treasury during the comment period.” Id. at 223 (Toro, J., concurring). At least ten other commenters challenged the Proceeds Regulation in some way such as suggesting that existing alternatives (i.e., the tax benefit and “so-remote-as-to-be negligible” rules) would preclude potential donor windfalls. See, e.g., AR at 433, 847.

In publishing the final regulations, Treasury did not discuss any of the comments made with respect to § 1.170A-14(g)(6)(ii), especially concerns about the treatment of donor improvements. Income Taxes; Qualified Conservation Contributions 51 Fed. Reg. 1496-98 (Jan. 14, 1986) (to be codified at 26 C.F.R. pt. 1) (see AR at 10-12). Treasury did not discuss or mention the Proceeds Regulation at all. The Regulation, in final form, reads:

(ii) Proceeds. In case of a donation made after February 13, 1986, for a deduction to be allowed under this section, at the time of the gift the donor must agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift, bears to the value of the property as a whole at that time. See § 1.170A-14(h)(3)(iii) relating to the allocation of basis. For purposes of this paragraph (g)(6)(ii), that proportionate value of the donee's property rights shall remain constant. Accordingly, when a change in conditions give rise to the extinguishment of a perpetual conservation restriction under paragraph (g)(6)(i) of this section, the donee organization, on a subsequent sale, exchange, or involuntary conversion of the subject property, must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction, unless state law provides that the donor is entitled to the full proceeds from the conversion without regard to the terms of the prior perpetual conservation restriction.

Treas. Reg. § 1.170A-14(g)(6)(ii).

C. Absence of IRS Guidance and Taxpayer Reliance

In the thirty years that followed, donors, land trusts, and federal agencies crafted or recommended template language that set aside proceeds attributable to post-easement improvements when computing the proceeds allocable to a land trust upon an easement's extinguishment. Donors, including Glade, relied on template language drafted and vetted by the land trusts.

In 2005, the Land Trust Alliance published the Conservation Easement Handbook (the “Handbook”), Elizabeth Byers & Karin Marchetti Ponte (2d ed. 2005). The Handbook explains that the regulations do not address “appreciation in value due to improvements, although allocation [consistent with the model deed] . . . is certainly called for as a matter of basic fairness.” Id. at 464. When allocating proceeds, the Handbook's model excludes “any increase in value after the date of this grant attributable to improvements not paid for by holder” from the value of the property on the date of extinguishment. Id. at 463.

In 2008, the IRS issued a private letter ruling concluding that:

[S]ection 1.170[sic]-14(g)(6)(ii) requirements are also met since section 14 of the Easement provides . . . the portion of the proceeds of any subsequent sale or exchange . . . of the Protected Property payable to the Donee represents a percentage interest in the fair market value of the Protected Property (less an amount attributable to the value of a permissible improvement made by Grantors, if any, after the date of the contribution of the Easement).

I.R.S. Priv. Ltr. Rul. 2008-36-014, 2008 WL 4102748 (Sept. 5, 2008) (emphasis added). Since 2008, the IRS issued no contrary guidance suggesting that subtraction of value attributable to donor improvements is impermissible. Since 2008, the IRS has challenged several other conservation easement deductions without challenging the proceeds provisions it claims are fatal here. See, e.g., BC Ranch II, L.P. v. Comm'r, 867 F.3d 547 (5th Cir. 2017); Palmer Ranch Holdings, Ltd. v. Comm'r, 812 F.3d 982 (11th Cir. 2016); Atkinson v. Comm'r, 110 T.C.M. (CCH) 550 (2015); Butler v. Comm'r, 103 T.C.M. (CCH) 1359 (2012).

In 2016, the IRS articulated for the first time — in litigation — its position that § 1.170A-14(g)(6)(ii) required an allocation of proceeds attributable to post-donation improvements to the land trust. See PBBM-Rose Hill, Ltd. v. Comm'r, No. 026096-14 (T.C. Oct. 11, 2016) (bench opinion) (United States Tax Court Docket Search). The IRS gave no explanation for its position change. By this time, Glade's Conservation Easement had been in place for nearly four years.

D. History of the Glade Property

In January 2006, International Land Company (“ILC”) purchased approximately 1,997 acres of land stretching over the Cumberland Plateau for over $9 million, intending to market lots on the property to out-of-state purchasers to build vacation homes. Op. at *3. Phase one of ILC's plan was a 677-acre parcel called Tract I. Id. Subsequent phases were Tracts II and III, 630.4 and 685.5 acre parcels, sandwiching Tract I. Id. Six years later, after millions of dollars of improvements were made to the property originally purchased for over $9 million, and at a time the area's real estate market was significantly appreciating, Glade donated the Conservation Easement over 1,312 acres of Tracts II and III (the “Easement Property”). Id. at *3, *5-6, *13, *19.

When ILC purchased the 1,997 acres “it was undeveloped, with rolling mountains and level, buildable areas, forests, streams, ponds, waterfalls, and four miles of bluffs overlooking the Sequatchie Valley.” Id. at *4. Significant infrastructure was constructed to support the proposed development, including improved water supply and “hydraulic capacity for water service, electrical infrastructure, and roads.” Id.

ILC, which was owned by out-of-state real estate developers, sought the advice of local businessman, James Vincent, on the property's development potential. Op. at *4. Vincent grew up in the area and “had contacts with local government officials to facilitate the project from his time as a commissioner of a nearby county where he served on the planning commission and as a State representative.” Id.; (Tr. 36:19-37:20). Vincent assisted with securing permits from State and local governments, utility contracts, and bank financing. Op. at *5. He invested significant sums in the infrastructure and personally guaranteed ILC's loans. Id.

“ILC obtained permits and approvals with respect to all three tracts.” Id. It constructed a $1.2 million pump station to provide enough hydraulic pressure to transport the water to the property. Id. It spent $2 million to install water pipes from the pump station throughout Tract I. Id. It sculpted and paved roads throughout Tract I and installed electrical infrastructure. Id.; (Tr. 60:10-25). “The improved water lines, roads, and electrical lines extended to the borders of Tracts II and III” (the Easement Property) to facilitate later planned development of those Tracts. Op. at *5. Overall, over $6 million and significant additional sweat equity was spent on the infrastructure and approval process. Id. at *6.

“ILC recorded the planned lots on Tract I and easements along creeks and waterfalls and placed restrictions on the cutting and clearing of timber.” Id. It was important to Vincent that the land be developed and maintained in a responsible and ecologically sensitive manner, a sentiment he conveyed to the homebuyers. (Tr. 63:4-19; 73:1-23).

ILC sold 121 lots throughout 2007 and 2008 on Tract I. Op. at *6. Bluff view lots sold for as much as $150,000. Id. In 2009, ILC stopped marketing the lots because its money dried up, slowing sales significantly. Id. The three investors felt enormous pressure and uncertainty, ultimately resulting in a financial separation of one of the investors from the project. Id.; (Tr. 105:21-22). Vincent, however, was committed to the project because he had invested substantial amounts of time and money in the project and had personally guaranteed ILC's bank loans. Op. at *6; (Tr. 61:1-2).

The prospect of future development of Tracts II and III by ILC's members continued to worsen due to the strife between the members, who were having financial issues, and were unable to market the property. (Tr. 73:24-74:7). Vincent, who personally guaranteed the debt, worried he would become solely responsible for all payments. Id.

Vincent learned about the possibility of a conservation easement after he spoke with his banker about solutions to manage the debt and retain control of the property. Op. at *8. At the bank's suggestion, Vincent sought advice from Matthew Campbell about the logistics of donating a conservation easement on the Easement Property. Id.

“Vincent also considered harvesting timber from the land [or] selling the land to a developer. . . .” Op. at *8. He believed that these two options would have raised more than enough money to repay ILC's debt. Id. However, for Vincent, neither option would satisfy his desire to protect the natural beauty of the Easement Property. Id. He felt a duty to the individuals who had purchased home sites on Tract I to maintain the original natural vision of ILC's plan. Id. He also was emotionally attached to the area and wanted to preserve the ridges, streams, and beautiful landscape. Id. At his age, he had no desire to develop the land himself, but he did not want to release control of the Easement Property to an unknown developer who could use it for a mobile home community, recreational vehicle park, or other environmentally insensitive development. Id.; (Tr. 109:11-17).

E. Donation of Conservation Easement on Tracts II and III

Vincent decided to pursue placing a conservation easement on Tracts II and BI. Op. at *9. Campbell understood from Vincent that his goal was to raise enough money to repay the outstanding debt and preserve the property. Id. Campbell designed the easement donation to occur through two newly organized entities, one to hold the Easement Property, Glade, and the second, Sequatchie Holdings, LLC (“Sequatchie”), to allow other individuals to obtain an interest in the Easement Property. Id. Sequatchie would use the proceeds to purchase from its members' investments in Sequatchie a majority membership interest in Glade, and then the members would vote whether to grant the conservation easement. Id. After obtaining a preliminary valuation of the easement from a qualified appraiser (Claud Clark, III), Campbell determined the economics of an easement could satisfy Vincent's objectives. (Tr. 113-15).

As the Tax Court noted, “Vincent believed that the land was worth substantially more than what Sequatchie paid for its Glade Creek interest.” Op. at *9. However, it was Vincent's opinion that the easement transaction was the only option that satisfied his objective to pay down the outstanding debt and preserve the property. Id.

Glade's manager, Campbell, engaged the professionals necessary to complete the easement transaction, including attorney Tim Pollock for tax advice on the easement deduction. Id. at *10. Pollock, who had done no previous work for Campbell, reviewed the Deed of Conservation Easement (“Easement Deed”) to ensure that it complied with § 170(h). Id.; (Tr. 115:10-25; 117:16-19). Campbell also engaged an appraiser, Claud Clark, III. Op. at *11. Clark used a “before and after” analysis to value the easement. Ex. 26-J at 2 (Doc. 20, p. 217). Clark used a hypothetical development similar to what was actually anticipated (and approved) to be constructed on Tracts II and III to determine the value of the Easement Property unencumbered by the easement. Id. at 15 (Doc. 20, p. 230).

On November 29, 2012, Sequatchie issued a private placement memorandum (“PPM”) offering membership interests to individuals. Op. at *11. The PPM estimated that a conservation easement would generate a charitable contribution deduction of $17.7 million based on Clark's appraisal. Id. at *12. Clark had no involvement in the offering and did not read the PPM before or after either of his appraisals, as he believed it had nothing to do with the work that he was doing. (Tr. 300:19-22; 320:6-21).

In December 2012, Glade's members (including the members of Sequatchie) elected to grant a conservation easement to the Atlantic Coast Conservancy, Inc. (“ACC” or “Conservancy”), on Tracts II and III. Op. at *13; (Tr. 151:9-25; 152:1-14). The Easement Deed conveying the Conservation Easement from Glade to the ACC was reviewed and blessed by Pollock based on the current law. (Tr. 179: 7-18). The Easement Deed, like other deeds used by land trusts throughout the country, contains a section addressing the unlikely event of an involuntary extinguishment of the Conservation Easement and allocates any proceeds from an extinguishment (“Proceeds Clause”) as follows:

[T]his Easement shall have at the time of Extinguishment a fair market value determined by multiplying the then fair market value of the Easement Area unencumbered by the Easement (minus any increase in value after the date of this grant attributable to improvements) by the ratio of the value of the Easement at the time of this grant to the value of the Easement Area, without deduction for the value of the Easement, at the time of this grant. The Conservation Values at the time of this grant shall be those Conservation Values used to calculate the deduction for federal income tax purposes allowable by reason of this grant, . . . [and] the ratio . . . shall remain constant.

Ex. 19-J at ¶ 15.2 (Doc. 20, p. 22).

Clark visited the Easement Property and then updated and reissued his appraisal on February 10, 2013.Op. at *15; Ex. 74-P at 11 (Doc. 25, p. 84); (Tr. 312:11-313:6). Prior to trial, the Commissioner stipulated that Clark was a qualified appraiser. Stipulation of Facts at ¶ 36 (Doc. 20, p. 8). The Commissioner further conceded, in his brief, that Clark's February 10, 2013 report was a “qualified appraisal.” See Resp't Simultaneous Answering Br. at 109 (Doc. 44, p. 121). Glade relied on the updated appraisal when claiming a deduction of $17,504,000 on its 2012 partnership tax return. (Tr. 123:8-10).

Glade's manager (Campbell) investigated and relied on Clark's second qualified appraisal. (Tr. 123:8-11; 168:21-169:1). Campbell was aware of Clark's prior success in court.(Tr. 122:8-18).As part of his due diligence, Campbell engaged a second appraisal expert, Mr. Clower. (Tr. 124:8-23). Clower determined that the value of the Conservation Easement was greater than determined by Clark. (Tr. 125:17-19).Campbell considered this appraisal as part of his good faith investigation into the value claimed by Glade on its tax return. (Tr. 124:15-25).

F. The IRS Challenges Glade's Charitable Deduction

In 2017, the IRS issued an FPAA disallowing Glade's easement deduction. Ex. 1-J (Doc. 20). The IRS neither gave a specific reason for denying the deduction nor did it explain that reason to Glade. Instead, it asserted broadly that “it has not been established that the claimed deduction meets all the requirements of Internal Revenue Code Section 170.” Id. at 7 (Doc. 20, p. 16). The IRS further determined, in the alternative, that the Conservation Easement — covering over 1,312 acres of imminently-developable real property overlooking the Sequatchie Valley — had a value of “$0.” Id.

And consistent with its general approach, the IRS asserted a 40% gross valuation penalty in the FPAA. Id. Also consistent with its approach, the IRS asserted several alternative penalties “attributable to one or more of the following: (1) a substantial understatement of income tax; (2) a substantial valuation misstatement; or (3) negligence or disregard of [unidentified] rules and regulations.”4 Id.

The expert used by the IRS at trial, Mr. Broome, could not support the IRS's theory that the value of the easement was zero. Instead, he testified the value of the Easement was only $630,000. Ex. 75-R at 3 (Doc. 25, p. 400); (Tr. 385:1-13, 397:1-18). However, Broome's testimony was proved to be so unsupportable, that, after trial, the IRS filed a status report with the court wherein it informed the court it was “abandoning” and “disavowing” its own expert. See Resp't Status R. ¶ 7 (Doc. 52, p. 302).

Left with no evidence in the record on value (because the IRS presented no other valuation witnesses), the IRS argued in brief that, as a matter of law, the value of the easement was what Glade's members paid for their interests. Resp't Opening Br. at 44, 100 n.15 (Doc. 40, pp. 96, 152). However, the Tax Court also dismissed this argument outright, noting that the position was belied by the evidence. See Op. at *54 (“We reject this argument as Mr. Vincent credibly testified that his objective in the subscription was to receive enough money to repay the Hawks Bluff debt. The subscription price was set for this purpose. It was not intended to reflect the easement property's fair market value, and it has no bearing on the easement property's fair market value.”). At this point, the IRS was left with neither evidence nor a theory as to why the value of the Easement was less than Glade claimed on its tax return.

The Tax Court determined the gross valuation penalty not applicable due to its determination that the Conservation Easement's value was $8,876,771. Op. at *55. It also determined that the IRS failed to establish the application of alternative penalties,5 except for the substantial valuation misstatement penalty, which the Tax Court determined applied. Id. at 55, 60.

STANDARD OF REVIEW

I. Standard of Review Applicable to Tax Court Decision

The Eleventh Circuit reviews “a tax court's legal conclusions and interpretations of the tax code de novo.” Ocmulgee Fields, Inc. v. Comm'r, 613 F.3d 1360, 1364 (11th Cir. 2010). However, the Eleventh Circuit reviews a tax court's “findings of facts and factual inferences, whether based on oral, documentary, or stipulated evidence, for clear error.” Id. “'A finding of fact is clearly erroneous if the record lacks substantial evidence to support it, so that our review of the entire evidence leaves us with the definite and firm conviction that a mistake has been committed.'” Id. (quoting Atl. Athletic Club v. Comm'r, 980 F.2d 1409, 1411-12 (11th Cir. 1993)).

A. The Tax Court's Charitable Contribution Determination

The Tax Court's determination that Glade is not entitled to a charitable contribution deduction is subject to de novo review. The Appellant identifies legal errors in the Tax Court's interpretation of Treasury regulation § 1.170A-14(g)(6)(ii). Therefore, those determinations are subject to de novo review. See Pine Mountain Preserve, LLLP v. Comm'r, 978 F.3d 1200, 1205 n.1 (11th Cir. 2020). Additionally, the validity of a Treasury Regulation is a legal question subject to de novo review. See, e.g., Herbel v. Comm'r, 129 F.3d 788, 790 (5th Cir. 1997).

B. The Tax Court's Penalty Determination

The Tax Court's determination that Glade is liable for the substantial valuation misstatement penalty is subject to de novo review because the IRS cannot meet its burden of establishing the application of a valuation penalty absent any evidence in the record to support the easement was substantially undervalued. Alternatively, the Tax Court's creation of its own valuation methodology, unsupported by the record, was a legal error.

A determination of fair market value is a mixed question of fact and law: legal conclusions are subject to de novo review while factual premises are subject to the clearly erroneous standard of review. Estate of Jelke v. Comm'r, 507 F.3d 1317, 1321 (11th Cir. 2007) (citing Estate of Dunn v. Comm'r, 301 F.3d 339, 348 (5th Cir. 2002)). Whether the Tax Court used the correct standard or method to determine value is a legal issue, thus subject to de novo review. Estate of Jelke, 507 F.3d at 1321 (citing Powers v. Comm'r, 312 U.S. 259, 260 (1941)).

The Tax Court necessarily had to create its own valuation standard or methodology in its determination that the value of the easement substantially overvalued on Glade's tax return (by between 150% to 200%) because the IRS presented no evidence regarding the easement's value and the Tax Court's valuation varied from the evidence presented by the Appellant. The Tax Court's methodology, as a legal conclusion, is therefore subject to de novo review in this case. See Succession of McCord v. Comm'r, 461 F.3d 614, 626 (5th Cir. 2006) (holding that a court's creation of valuation methodology was legal error).

The Tax Court used incorrect factual assumptions, unsupported by the record, in reducing Glade's expert's valuation determination. This determination is subject to de novo review. See Estate of Elkins v. Comm'r, 767 F.3d 443, 449 (5th Cir. 2014) (“[D]e novo review is appropriate here because 'there [are] pure question[s] of law imbedded in the valuation calculus.'”) (quoting Adams v. U.S., 218 F.3d 383, 385-86 (5th Cir. 2005)).

Finally, the Tax Court's determination, contrary to all the evidence, that Glade did not rely in good faith on its qualified appraisal is subject to de novo review. See Whitehouse Hotel Ltd. P'ship v. Comm'r, 755 F.3d 236, 247 (5th Cir. 2014) (“The legal question of 'what elements must be present to constitute reasonable cause' is reviewed de novo. We review for clear error whether those elements were actually proven.”) (internal citations omitted).

SUMMARY OF ARGUMENT

Vincent owned 1,997 acres of pristine real estate on the Cumberland Plateau, in the area where he grew up. See Op. at *4. After purchasing the entire parcel for over $9 million and then investing millions of additional dollars and sweat equity into the property, Vincent and his partners successfully sold lots on Tract I of the property to individuals throughout the country seeking vacation homes. Id. at *3-6. Pursuant to Vincent's vision, Tract I was developed in an environmentally sensitive manner with a nature theme that incorporated green space, walking trails, waterfalls, and neighborhood covenants to protect the theme. Op. at *8; (Tr. 43:3-13, 63:4-19, 72:24-73:23). Tracts II and III, consisting of 1,312 acres (the Easement Property), were functionally identical to the adjacent, recently developed Tract I, and directly benefited from the approvals, amenities, utilities, roads infrastructure, and existing marketing and sales occurring next door. See Op. at *6.

Based on external factors and his age, Vincent did not want to develop Tracts AI. and III. See Id. at *8. However, the Property was encumbered with debt that Vincent personally guaranteed. Id. at *7. Vincent could have just timbered or sold the property and paid off the debt. Id. at *8. The record demonstrates that this would have generated substantial profits for Vincent. Id. However, Vincent had an overriding compulsion to protect and preserve the property. Id. A conservation easement was the perfect solution. Congress passed the provision for this very reason.

With the help of Campbell, outside individuals obtained interests in Glade (and ultimately the Easement Property). Op. at *11. The members then elected to grant the Conservation Easement. Id. at *13. The donation entitled Glade, and its members, to a deduction equal to the fair market value of the Conservation Easement — no more and no less. Treas. Reg. § 1.170A-14(h)(i). The IRS never articulated anything inappropriate about this partnership structure in the FPAA, at trial, or during the months of briefing that followed. And the IRS conceded that the Glade Property was worthy of protection. See Stipulation of Settled Issues at ¶ 1. (Doc. 19, p. 105).

Rather, the IRS determined that Glade's deduction should be disallowed because the Proceeds Clause in the Easement Deed fails to satisfy the IRS's ambiguous, nonsensical regulation. This result driven position should be dismissed. After years of indicating that “proceeds clauses” such as Glade's were appropriate, the IRS seized on the inherent ambiguity of the Regulation to deny hundreds, if not thousands, of easement donations. The Proceeds Regulation, which was not properly promulgated in accordance with the Administrative Procedure Act (“APA”), is invalid.

The Tax Court's determination that Glade is liable for a substantial valuation misstatement penalty should also be reversed. The IRS's arbitrary determination that the Conservation Easement had no value, and its expert's determination that the Conservation Easement was worth only $630,000, were both abandoned by the IRS. The IRS has no evidence in the record to sustain its burden of establishing the application of valuation penalties, and the Tax Court erred by determining otherwise.

Similarly, the Tax Court adopted Glade's determination that the highest and best use of the Easement Property was for residential development. Op. at *32-34. There is no evidence in the record contradicting the Conservation Easement's value based on this highest and best use. The Tax Court erred by adjusting Glade's valuation based on uncontradicted evidence.

In the alternative, Glade should not be penalized because Glade relied, in good faith, on a qualified appraisal.

ARGUMENT

I. The IRS Has Not Met Its Burden of Establishing Glade Is Liable for a Substantial Valuation Misstatement Penalty

A taxpayer makes a substantial valuation misstatement if the claimed value on its return is more than 150% but less than 200% of the correct amount. However, no penalty will apply where the taxpayer establishes (A) the claimed value of the property was based on a qualified appraisal made by a qualified appraiser, and (B) the taxpayer made a good faith investigation of the value. I.R.C. § 6664(c)(3). The IRS has the burden of establishing a taxpayer is liable for a substantial valuation misstatement penalty. See I.R.C. § 7491(c).

Here, a substantial valuation misstatement penalty cannot apply because the IRS has not established that the Conservation Easement's value was less than $11,669,333.6 The IRS presented no evidence to support that the Conservation Easement's value was anything less than what was claimed by Glade. Moreover, the Tax Court agreed with Glade's experts that the highest and best use of the Easement Property before the grant of the Easement was for residential development and that the IRS “did not present any evidence of the easement property's value to a developer. . . .” Op. at *34, 41. The Tax Court, therefore, abused its discretion in determining the Conservation Easement's value was less than Glade claimed. The Tax Court further compounded its error by making adjustments to Glade's valuation unsupported by the record.

In the alternative, the Tax Court erred by determining that Glade did not satisfy I.R.C. § 6664(c)(3). Glade obtained a qualified appraisal by a qualified appraiser. Glade's manager, Campbell, testified that he relied on the appraisal in good faith. Campbell even obtained a second appraisal as part of his due diligence. There is no evidence contradicting this testimony. The Tax Court erred by imputing a mental state to Campbell not supported by the record, i.e., that he knew the Conservation Easement's value was much lower.

A. The Record Does Not Support Respondent's Three Inconsistent Value Positions

The IRS has the burden of establishing that Glade is liable for a substantial valuation misstatement penalty. See I.R.C. § 7491(c).Part of that burden is producing evidence that Glade substantially overstated the Conservation Easement's value.7And although the IRS asserted three (inconsistent) valuation positions, all three were abandoned by the IRS or dismissed by the Tax Court. Absent any evidence remaining on value, the IRS cannot meet its burden of establishing Glade is liable for a substantial valuation penalty. See I.R.C. § 6664(c)(1). This is certainly the result here, where the IRS chose to abandon its expert and argue, as a matter of law, the Conservation Easement's value was $3,063,161 — or what Sequatchie paid for its interests in Glade. See Estate of Elkins, 767 F.3d at 450 (“having put all of his eggs in the one, no-discount basket at trial, the Commissioner cannot be heard on appeal to question the quantity, quality, or sufficiency of the evidence adduced by the Estate to prove the quantum of the fractional-ownership discounts to be applied”).

1. Respondent's Position that the Value of the Easement Was Zero Is Unsupportable and Was Abandoned

The Commissioner's position that the Easement had zero value has no basis and raises concerns about the IRS's motivations. See Caracci v. Comm'r, 456 F.3d 444, 457 (5th Cir. 2006) (citing Dunn, 301 F.3d at 349) (“This court has recognized that when, as here, the Commissioner persists in taking a position in litigation that is 'so incongruous as to call his motivation into question, . . . [i]t can only be seen as one aimed at achieving maximum revenue at any cost.'”).

At a minimum, the Tax Court should have determined that the IRS had the burden of proving its valuation (of zero) was correct. “In a Tax Court deficiency proceeding, once the taxpayer has established that the assessment is arbitrary and erroneous, the burden shifts to the government to prove the correct amount of any taxes owed.” Caracci, 456 F.3d at 457 (internal quotation omitted).

2. The IRS Abandoned its Expert's Opinion

The IRS's second valuation position, Broome's testimony that the Conservation Easement was worth $630,000, was abandoned by the IRS and eventually rejected by the Tax Court. It is necessarily insufficient to satisfy the IRS's burden.

Although the Tax Court allowed portions of Broome's testimony into evidence at trial, the testimony was so incredible that, after trial, the IRS filed a “Status Report” with the Tax Court requesting the Tax Court exclude Broome's report and his testimony entirely. See Resp't Status R. ¶ 7 (Doc. 52, p. 302) (“Respondent now withdraws his reliance on Exhibit 75-R and asks that the Court not rely on Mr. Broome's report (Exhibit 75-R) and testimony. Respondent disavows and abandons Mr. Broome's expert report and no longer relies on it for any finding of fact or argument in this case.”) (emphasis added).

The Tax Court did not address Glade's request for the Court to determine, as a matter of law, that the IRS conceded its valuation case by moving to exclude its only evidence. See Pet'r Obj. to Mot. For Leave to File Status R. at 8 (Doc. 53, p. 313) (“Petitioner further requests the Court to determine, as a matter of law, that Respondent has conceded valuation in this case by abandoning his position as set forth in the FPAA and Respondent's Pretrial Memorandum.”). And by failing to grant such relief, the Tax Court erred.

The Tax Court ultimately rejected Broome's premise that the Easement Property was undevelopable, finding that “[r]esidential development was physically and financially feasible on the easement date.” Op. at *34. It placed “no weight on Mr. Broome's before valuation.” Id. at *40.

3. The IRS's Third Valuation Theory Was Dismissed by the Tax Court Because It Was Belied by the Evidence

Finally, after trial the IRS argued that, as a matter of law, the Conservation Easement's value was $3,063,161 — the amount paid by investors in Glade. However, the Tax Court also dismissed this argument, finding it was belied by the evidence. See Op. at *54. (“We reject this argument as Mr. Vincent credibly testified that his objective in the subscription was to receive enough money to repay the Hawks Bluff debt. The subscription price was set for this purpose. It was not intended to reflect the easement property's fair market value, and it has no bearing on the easement property's fair market value.”).

By abandoning its first two valuation theories, the Commissioner put “all of his eggs in one . . . basket” and the Tax Court should have determined that the IRS failed to meet its burden of establishing that Glade undervalued the Conservation Easement when it rejected the IRS's third inconsistent argument. Estate of Elkins, 767 F.3d at 450.

B. The Tax Court Erred by Concocting Sua Sponte a Valuation Method Unsupported by the Record and Advanced by Neither Party

The Tax Court agreed with Glade's experts, Clark and Norton, that “residential development is the unencumbered property's highest-and-best use.” Op. at *34. At this point, Glade's appraisal was not merely more accurate, it was the only appraisal evidence in the record based on the correct highest-and-best use.

Therefore, the Tax Court erred by not finding that the IRS failed to meet its burden. See Caracci, 456 F.3d at 457-58 (holding that where “the Tax Court rejected most of the only support the Commissioner provided” regarding valuation, the Tax Court should have found in the taxpayers favor).

Rather than accept Clark's determination that the Conservation Easement's value was $17,504,000, the Tax Court sua sponte devised its own appraisal method to derive a different value. This too was legal error. See McCord, 461 F.3d at 626 (finding a Tax Court commits legal error by “confecting sua sponte its own methodology for determining” fair market value.); Harden v. Comm'r, 223 F.2d 418, 421 (10th Cir. 1955) (where the IRS does not advance an accurate valuation method, the Tax Court cannot adopt its own valuation method). See also JPMorgan Chase Co. v. Comm'r, 458 F.3d 564, 572 (7th Cir. 2006) (noting that “courts have questioned the tax court's authority to craft its own accounting methods”); Caracci, 456 F.3d at 447-55; Estate of Elkins, 767 F.3d at 450 (reasoning that the “case should have ended at that point with a judgment for the [taxpayer]”).

The Tax Court's decision to produce its own analysis in this instance is particularly problematic because there is nothing in the record to support the Court's adjustments. The IRS abandoned its only expert on valuation. And the IRS presented no other evidence on valuation — fact, expert, or otherwise. The IRS presented no evidentiary basis upon which the Tax Court could adjust Clark's valuation. Indeed, the Court acknowledged such: “Respondent did not present any evidence of the easement property's value to a developer.” Op. at *41. (emphasis added).

Absent any evidence Clark's opinion, the Tax Court erred by adjusting Clark's valuation based on assumptions and suppositions not supported by the record:

  • “Clark's $100,000 price for lakefront and bluff view lots was likely too high;”

  • “We estimate that costs would be lower in each year;”

  • “Petitioner argues the homebuilding costs are irrelevant for purposes of valuing the land. While that may be true, in our opinion such costs are a factor that a hypothetical developer would consider;”

  • Determining, absent any evidence in the record that “the 18% return on equity insufficient to account for the risk to a hypothetical developer;”

  • “RealtyRates.com” to determine discount rate when IRS offered no evidence supporting the applicability of the website or the rates.

Op. at *47-51 (emphasis added).

The Court's application of the RealtyRates.com discount rate is particularly problematic because it is the primary driver of the Tax Court's downward departure from Clark's valuation. The only reference to RealtyRates.com in the record is Clark's report wherein he states we

also considered data provided by the 4th Quarter 2012 edition of RealtyRates.Com, a Quarterly Survey of Developers . . . This rate does not separate the entrepreneurial profit from the risk component as our analysis does. Our conclusion of a combined 26.25% tends to be at the midpoint to slightly higher of the range due to the market position for the subject property.

Ex. 26-J at 76 (Doc. 20, p. 291). The IRS's expert, Broome, offered no contrary opinion on this issue, and there is no further evidence in the record contradicting Clark's determination. The Court erred by determining, absent evidence in the record, that a different application of the discount rate was appropriate. See Palmer Ranch, 812 F.3d at 1004 (“Whatever the tax court chooses to do, the court must keep its sights set strictly on the evidentiary record for purposes of selecting an appreciation rate.”)

C. The Tax Court Erred by Determining that Glade Did Not Satisfy the Requirements of I.R.C. § 6664(c)(3)(B)

A substantial valuation penalty will not apply where the taxpayer establishes (A) the claimed value of the property was based on a qualified appraisal made by a qualified appraiser, and (B) the taxpayer made a good faith investigation of the value. I.R.C. § 6664(c)(3). The Tax Court erred by determining that Glade did not satisfy I.R.C. § 6664(c)(3). Uncontroverted evidence establishes that Campbell made a good faith investigation of the Conservation Easement's value, which was based on a qualified appraisal by a qualified appraiser.

The charitable deduction claimed by Glade was based on Clark's appraisal. The IRS stipulated that Clark was a “qualified appraiser.” Stipulation of Facts at ¶ 36 (Doc. 20, p. 8). The IRS subsequently conceded in brief that Clark's appraisal was a qualified appraisal. See Resp't Simultaneous Answering Br. at 109 (Doc. 44, p. 121). Campbell testified that, as the manager of Glade, he relied on Clark's appraisal and explained why. (Tr. 122:10-123:19). Yet the Tax Court determined that Glade did not satisfy I.R.C. § 6664(c)(3)(B). Op. at *57.

The Tax Court provided no explanation for its determination except that it found “that the appraiser's determined the before value to achieve the tax savings goals of the easement transaction and did not attempt to accurately ascertain the easement's fair market value.” Op. at *56-57. This finding, however, is unsupported and is contradicted by the record. Clark did not read the transaction documents sent to the investors as he believed it had nothing to do with the work he was doing. (Tr. 300:19-22; 320:6-21). Therefore, Clark could not have known what Vincent's or Campbell's tax savings goals were, much less the value needed to accomplish those goals. Similarly, nothing in the record indicates that Clower had any knowledge of Vincent or Campbell's objectives. And although the transaction may not have been feasible if the Conservation Easement's value was significantly less than what Clark determined, that does not mean Clark inflated the appraisal to bring about the transaction. Indeed, it is likely that many donors might decide not to do an easement if an appraiser determines the value of the donation is less than acceptable to the donor. This, however, does not infer that donors that decide to make easement donations necessarily used inflated appraisals.

Campbell testified that he relied in good faith on Clark's appraisal. (Tr. 123:8-11). And, at the time of the donation, Clark's valuations had been upheld in the face of immense IRS scrutiny. See Kiva Dunes Conservation, LLC v. Comm'r, 97 T.C.M. (CCH) 1818 (2009). Although the IRS has since set its sights on Clark, at the time of Glade's donation there were only positive outcomes related to Clark's work.

The reasonableness of Campbell's reliance on Clark is further supported by the widely disparate valuations that have been asserted by the IRS throughout this litigation. The IRS initially asserted the easement had a value of zero. The IRS's expert departed from this position and determined the easement was worth $630,000. The IRS then disavowed its own expert and asserted in brief the Conservation Easement was worth $3,063,161. All these valuations dramatically depart from the sales and infrastructure history of property purchased by ILC (acquisition and investment costs of over $15,000,000) and from the court's determination that the easement was worth $8,876,771. The IRS's assertion that Campbell knew, or should have known, that Clark overvalued the Easement cannot be reconciled with the IRS's and the Tax Court's disparate valuation determinations. See Whitehouse Hotel, 755 F.3d at 250 (5th Cir. 2014) (“We are particularly persuaded by Whitehouse's argument that the Commissioner, the Commissioner's expert, and the tax court all reached different conclusions.”).

Campbell also engaged a second appraiser, James Clower, as part of his due diligence. Op. at *11. Clower confirmed that Clark's valuation was reasonable, if not conservative. (Tr. 125:15-19). Nothing in the record contradicts Campbell's good faith reliance on Clower. The Tax Court erred in dismissing, without any explanation, Campbell's reliance on Clower. See Whitehouse Hotel, 755 F.3d at 250 (“Obtaining a qualified appraisal, analyzing that appraisal, commissioning another appraisal, and submitting a professionally-prepared tax return is sufficient to show a good faith investigation as required by law. See I.R.C. § 6664(c)(3)(B).”) How, indeed, can the Tax Court assert that Glade was unjustified in relying on an appraisal that was determined to be more accurate than the IRS's FPAA position and that the appraisal the IRS proffered at trial?

II. The Proceeds Regulation Is Invalid Because Treasury Failed to Comply with the APA's Procedural Requirements

The APA mandates the requirements that agencies must follow when promulgating regulations.8 5 U.S.C. § 553. Relevant here is the APA's requirement that:

After notice . . . the agency shall give interested persons an opportunity to participate in the rule making through submission of written data, views, or arguments . . . After consideration of the relevant matter presented, the agency shall incorporate in the rules adopted a concise general statement of their basis and purpose.

§ 553(c).9 This Court has held that the basis and purpose statement should clearly and fully explain the factual and legal basis for a rule, enabling a reviewing court “to see the objections and why the agency reacted to them as it did.” Lloyd Noland Hosp. & Clinic v. Heckler, 762 F.2d 1561, 1566 (11th Cir. 1985) (emphasis added). A court should take a “hard look” at the administrative record and should avoid rubber-stamping agency action. Port of Jacksonville Mar. Ad Hoc Comm., Inc. v. U.S. Coast Guard, 788 F.2d 705, 708 (11th Cir. 1986).

A hard look is necessary here because, as Judge Thapar of the Sixth Circuit recently observed: “In recent years, [the IRS] has begun to regulate an ever-expanding sphere of everyday life—from childcare to charity to healthcare and the environment. That might be okay if the IRS followed the basic rules of administrative law. But it doesn't.” CIC Servs., LLC v. Comm'r, 936 F.3d 501, 507 (6th Cir. 2019) (mem.) (Thapar, J., dissenting), rev'd, 141 S. Ct. 1582 (2021). See also Oakbrook, 154 T.C. at 222 (Toro, J., concurring) (“When an agency engaged in a particular rulemaking exercise believes the APA does not require it to provide notice and receive comments at all, it is not difficult to see why that agency might think that a rather brief explanation, offered as it were out of its own generosity, should be good enough.”).

A. The Basis and Purpose Statement Fails to Explain the Proceeds Regulation or Respond to Relevant, Significant Comments

This issue is fundamental to APA principles because the basis and purpose statement here does not mention the Proceeds Regulation at all. Basis and purpose statements provide courts with a mechanism to ensure that the agency has examined “the relevant data and articulate[d] a satisfactory explanation for its action including a rational connection between the facts found and the choice made.” Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2125 (2016) (internal quotations omitted). When an agency fails “to provide even that minimal level of analysis, its action is arbitrary and capricious and so cannot carry the force of law.” Id.

Regarding the promulgation of regulations addressing § 170(h), Treasury received approximately ninety comments (over 700 pages of commentary). Oakbrook, 154 T.C. at 186. Thirteen commenters directly addressed the Proceeds Regulation. Id.; see AR at 123-1003 (Doc. 23). And in response, Treasury added only two pages (six columns) addressing the eight hundred pages of comments and two hundred pages of public testimony. See 51 Fed. Reg. at 1496-98.

Not a single word in those columns mentions the Proceeds Regulation. Id. Judge Holmes, in his dissent in Oakbrook, found that the basis and purpose statement failed to comply with the APA for multiple reasons. Oakbrook, 154 T.C. at 239 (Holmes, J., dissenting). First, “[t]he Final Rule's statement of basis and purpose shows absolutely no mention of the extinguishment-proceeds clause at all, much less any mention of the proportionate-share or improvements problems.” Id. The preamble contains “no reasoned response to any of the public's comments on those provisions.” Id. Compared to the final Regulations' extensive discussion of negative comments received regarding other issues proposed, for example, when preserved open space satisfies the Code, the absence of Treasury's discussion of post-extinguishment proceeds bleakly stands out. 51 Fed. Reg. at 1496-98.

In addition to providing a reasonable explanation for a rule, an agency must also “rebut vital relevant comments.” Lloyd Noland, 762 F.2d at 1567. As Judge Holmes explained, the comments addressing the Proceeds Regulation were relevant and significant under any court's relevancy standard because the comments addressed an issue with the proposed regulation and identified why the issue was troublesome. Oakbrook, 154 T.C. at 243 (Holmes, J., dissenting). First and foremost, the comment by New York Landmarks Conservancy (“NYLC”) is a vital relevant comment that Treasury should have addressed in the basis and purpose statement. See, e.g., United States v. Nova Scotia Food Prod. Corp., 568 F.2d 240, 253 (2nd Cir. 1977) (showing that even a single comment, if it is relevant and significant, can require an agency response).

This comment states that the proposed regulation:

  • would deter prospective donors from donating conservation easements due to potential inequitable allocations (AR at 376-77);

  • improperly assumed that a conservation easement represented a positive economic value to the donee in connection with post-extinguishment proceeds (Id.);

  • potentially conflicted with the provision and state condemnation law (Id. at 377-78);

  • included a ratio that failed to take into account improvements made by the landowner after donation, and it neglected to explain whether improvements altered the ratio. (Id.)

NYLC suggested the Regulation's deletion due to its potential adverse effect on donations. Id. at 376-77.

At least ten other comments addressed (1) challenges to the Regulation's wording (AR at 430, 504, 773-75, 791); (2) the donee's role in valuing the property right (Id. at 504, 514, 582, 865); (3) whether the Regulation would create adverse conservation incentives (Id. at 376-78, 381, 786, 791); (4) whether the allocation is enforceable against subsequent landowners (Id. at 847); (5) whether real estate transfer taxes would apply (Id. at 433, 786); and (6) whether the Regulation is superfluous, enforceable, or superseded by other applicable rules (Id. at 433, 792, 847). Several commenters proposed alternatives to the proposed regulation or its wording. Oakbrook, 154 T.C. at 244-45 (Holmes, J., dissenting). Even the commenters who thought the Regulation was appropriate “thought the provision needed to be clearer.” Id. at 244.

For the reasons outlined in Judge Holmes's dissent in Oakbrook, the Tax Court majority's purported justification of Treasury's failure to address or even mention these comments should not pass muster here. See Oakbrook, 154 T.C. at 237-53 (Holmes, J., dissenting). The disallowance of Glade's and Hewitt's deductions, along with hundreds of other deductions, based on the very issues raised in NYLC's comment demonstrates its significance. As Judge Toro observed, “the Commissioner's actions belie any claim that the comment did not raise a significant issue.” Id. at 227 (Toro, J., concurring).

Treasury's failure to mention NYLC's comment (and others) and to explain why it declined to alter the final rule invalidates the Regulation. See Home Box Office, Inc. v. F.C.C., 567 F.2d 9, 35 n.58 (D.C. Cir. 1977). This failure not only violated the agency's obligation to engage in dialogue with the public, but also left this Court with no basis to review the reasonableness of Treasury's decision. Id. The dual purposes served by the APA are unmet here.

III. The Government's Interpretation of the Proceeds Regulation Renders the Regulation Invalid Under Chevron

The government's interpretation of the Proceeds Regulation, requiring donors to share extinguishment proceeds attributable to post-donation improvements, is invalid under Chevron's approach to statutory interpretation and cannot meet the reasoned decision-making requirement in Motor Vehicle Mfr. Ass'n of the U.S. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).

Chevron deference is applicable only where “Congress explicitly or implicitly expect[s] the agency to be able to speak with the force of law . . .” Martin v. Soc. Sec. Admin., 903 F.3d 1154, 1159 (11th Cir. 2018) (internal citation omitted). If Congress provides such an avenue, courts follow a two-step analysis in reviewing an agency's regulatory interpretation. First, the court determines whether Congress has “directly spoken to the precise question at issue.” Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842 (1984). If not, the court considers whether the interpretation is “arbitrary or capricious in substance, or manifestly contrary to statute.” Mayo Found. for Med. Educ. & Research. v. United States, 562 U.S. 44, 53 (2011) (internal quotations omitted).

The Supreme Court in State Farm set forth for the court's consideration the following factors to evaluate an agency decision:

The scope of review under the “arbitrary and capricious” standard is narrow and a court is not to substitute its judgment for that of the agency. Nevertheless, the agency must examine the relevant data and articulate a satisfactory explanation for its action including a “rational connection between the facts found and the choice made.”

463 U.S. 29 at 43 (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168 (1962)) (emphasis added). When an agency fails to articulate any satisfactory explanation for its actions, “[t]he reviewing court should not attempt itself to make up for such deficiencies: 'We may not supply a reasoned basis for the agency's action that the agency itself has not given.'” State Farm, 463 U.S. at 43 (quoting SEC v. Chenery Corp., 332 U.S. 194, 196 (1947)).

Initially, the record before the Tax Court demonstrates that the Proceeds Regulation fails Chevron “step zero,” and secondly, as now interpreted by the IRS and the Tax Court, the Regulation is not reasonable and instead is arbitrary, capricious, and manifestly contrary to statute.

A. The Proceeds Regulation Exceeds Treasury's Authority when Congress Declined to Impose Such a Requirement

This Court should invalidate the Regulation as Treasury's unlawful regulatory promulgation based on the legislative history, which shows that Congress considered, and declined to impose an obligation on the landowner following an easement's extinguishment. See Hamdan v. Rumsfeld, 548 U.S. 557, 578-79 n.10 (2006) (finding Congress's deliberate omission of wording indicative of the statute's plain meaning and considering Congress's statements to find support for a deliberate omission).

In June 1980, the Joint Committee on Taxation posed the following question in connection with the House bill that became current § 170(h): “Should rules be provided for situations where a transferred interest in real property, for which a deduction was allowed . . . ceases to be used in furtherance of the conservation purposes?”10

During a hearing, such a provision was argued to be unnecessary because state law would govern compensation of the easement holder, easement holders would not allow the extinguishment of their easement without compensation, and existing tax benefit rules would operate to repay the public's investment. Minor Tax Bills: Hearings Before the Subcomm. on Select Revenue Measures of the House Comm. on Ways and Means, 96th Cong. 223, 248 (1980). Only one individual suggested that Treasury should be given the responsibility of developing rules to address easements that cease serving their purpose. Id. at 245.

Neither § 170(h) nor the accompanying Senate Report imposed a rule addressing extinguishment proceeds, and Congress did not directly or implicitly direct Treasury to do so. See Tax Treatment Extension Act of 1980, Pub. L. No. 96-541, 94 Stat. 3204; S. Rep. No. 96-1007, at 13 (1980), as reprinted in 1980 U.S.C.C.A.N. 6736, 6748 (encouraging Treasury to draft regulations concerning only whether “the contemplated contribution will be considered to have been made for a qualifying conservation purpose”). Creating regulations addressing issues that Congress declined to address, with no explicit or implicit authority from Congress, is an impermissible interpretation of the statute and fails Chevron “step zero.” See Martin, 903 F.3d at

B. The Proceeds Regulation Is Arbitrary and Capricious

Additionally, the Commissioner cannot avail himself of Chevron deference while also flouting APA requirements that underlie agency deference. Encino, 136 S. Ct. at 2125. Applying the arbitrary and capricious standard of Chevron, the court “must assess, among other matters, 'whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment.'” Judulang v. Holder, 565 U.S. 42, 53 (2011) (quoting State Farm, 463 U.S. at 43). In sum, the court is required to “examine[ ] the reasons for agency decisions — or, as the case may be, the absence of such reasons.” Id.

In Judulang, the Supreme Court confirmed that analysis of the reasonableness of the agency's action under State Farm “would be the same” under Chevron step two because “we ask whether an agency interpretation is arbitrary or capricious in substance.” 565 U.S. at 52 n.7 (internal quotations omitted). This Court has explained that step two of Chevron is “functionally equivalent to [the] traditional arbitrary and capricious” standard under State Farm. Nat'l Mining Ass'n v. U.S. Dep't of Labor, 812 F.3d 843, 865 n.23 (11th Cir.).

Here, when Treasury offered no explanation, Treasury's decision cannot be the product of reasoned decision-making. The reviewing court “may not supply a reasoned basis for the agency's action that the agency itself has not given.” State Farm, 463 U.S. at 43.

The Proceeds Regulation, under the IRS's interpretation, requires that the donor agree that he, and any future owners of the underlying property, will give the donee proceeds in which the donor retains a legal interest as contemplated by § 170(h) if the easement is extinguished. In imposing this requirement, Treasury gave no indication that it examined the relevant data, never explained the agency's action, and provided no evidence of a rational connection between the facts found and decision made. See Qualified Conservation Contributions, 51 Fed. Reg. at 1496-98. In sum, Treasury offered no reason for its decision.

In sum, the Proceeds Regulation fails the reasoned decision-making standard of State Farm, as well as the second step of Chevron, and constitutes an arbitrary, capricious, and invalid statutory interpretation.

C. Properly Interpreted, the Proceeds Regulation Does Not Require Any Allocation of Extinguishment Proceeds Attributable to Post-Donation Improvements

This Court should interpret the Proceeds Regulation, if valid, to permit donors to meet the perpetuity requirement while retaining the right to any increase in value attributable to post-donation improvements in the event of extinguishment. Such an interpretation is consistent with the IRS's longstanding treatment of improvements (until its litigation-driven about-face), with the Regulation's text, and with the legal interests contemplated by the statute.

The IRS denied Glade's deduction in full even though Glade had a standard clause11 in its Easement Deed. In 2012, when Glade donated its Conservation Easement, the IRS had never challenged the standard clause. Though the Tax Court and the Fifth Circuit have since concluded that the Proceeds Regulation entitles a donee to a proportionate share of proceeds attributable to post-donation improvements, this interpretation yields inequitable and absurd results and does not enhance conservation.

The Tax Court held that the “deed improperly subtracts any value attributable to post-easement improvements from the extinguishment proceeds before determining the Conservancy's share.” Op. at *25. In so doing, the Tax Court observed that “[t]he plain text of the proceeds regulation requires the donee to receive a proportionate share of the extinguishment proceeds.” Id. However, the Tax Court includes in the donee's share all proceeds, including those attributable to post-donation improvements in which the donee has no legal or financial interest.

This is inconsistent with the property rights conveyed. Simply put, the post-donation improvements are not “sticks” in the bundle of ownership sticks donated to the land trust. Requiring that the land trust be compensated for sticks it does not own is not a reasonable reading of the Regulation.

As Judge Toro observed, the topic of improvements is “wholly absent from the text of the regulation.” Oakbrook, 154 T.C. at 207 (Toro, J., concurring). He found that the Regulation was susceptible to two different readings. Id. at 208. Under the first alternative, the proportionate values of the donor's and donee's partial interests must remain constant even as the fair market value of the property as a whole varies with market conditions. See id. at 209-12. Under this approach, that proportion is determined at the time of the easement with respect to property existing at the time of the donation, and any subsequent improvements made by the donor could be valued and accounted for separately. Under the second alternative (first advanced by the IRS in 2016), the easement deed “must provide that the proportionate value of the donee's property rights will remain constant no matter what the donor does with respect to its own partial real property interest after the easement is granted.” Id. at 212-13. But as Judge Toro explained, the first approach should rule because there is no textual reason why the Proceeds Regulation “may be read to force the donor to promise in the deed that the donor will turn over to the donee proceeds properly attributable to the donor's own retained real property interest.” Id. at 212.

Additionally, the absurd results of the Commissioner's interpretation include: (1) joint liability of the charity and landowner for any unpaid obligations secured by those improvements; (2) transfer taxes owed by the charity if the post-donation home is sold while the easement is in place; and (3) the charity's legal obligations to maintain improvements on property owned by a third-party. 12 The practical impact of this absurdity is that landowners will carve out any potential “building areas” from the eased property or will improve the property before putting an easement on it. Such a practice undermines conservation because the land trust loses the ability to oversee the construction of improvements.13

CONCLUSION

Mr. Vincent and Glade utilized the Congressionally authorized conservation easement deduction to preserve pristine property that the IRS conceded was worthy of protection. The Easement Property will be perpetually protected from the encroaching development, clearcutting, or any other type of environmental degradation. Yet, the Tax Court denied Glade any charitable deduction for its multimillion-dollar donation because the Easement Deed crafted by the ACC allegedly failed to comply with the IRS's ever-changing interpretation of its Regulation. This determination should be reversed because the IRS's litigation-based interpretation is inconsistent with the Regulation and the Internal Revenue Code. And in any event, the Proceeds Regulation was not promulgated in compliance with the APA.

Further, Glade cannot be liable for a substantial valuation misstatement penalty. The IRS conceded that the appraiser and appraisal that Glade relied on were “qualified.” The IRS presented no evidence to carry its burden of establishing the Conservation Easement's value was less than claimed on Glade's return. And even if the Easement was substantially understated, Glade reasonably relied on a qualified appraisal by a qualified appraiser that, even according to the Tax Court, was more accurate than the value determined by the IRS in the FPAA and by the IRS's expert.

Respectfully submitted,

DENTONS SIROTE PC

Gregory P. Rhodes
Dentons Sirote PC
2311 Highland Avenue South
Birmingham, AL 35205
205-930-5445 (telephone)
205-212-2933 (facsimile)
gregory.rhodes@dentons.com

Michelle Abroms Levin
Dentons Sirote PC
305 Church Street SW, Suite 800
Huntsville, AL 35801
205-518-3605 (telephone)
205-518-3681 (facsimile)
michelle.levin@dentons.com

Sidney W. Jackson, IV
Dentons Sirote PC
2311 Highland Avenue South
Birmingham, AL 35205
205-930-5208 (telephone)
205-313-0665 (facsimile)
sidney.jackson@dentons.com

Logan C. Abernathy
Dentons Sirote PC
305 Church Street SW, Suite 800
Huntsville, AL 35801
205-518-3609 (telephone)
205-518-3681 (facsimile)
logan.abernathy@dentons.com

Sarah E. Green
Dentons Sirote PC
305 Church Street SW, Suite 800
Huntsville, AL 35801
205-518-3616 (telephone)
205-518-3681 (facsimile)
sarah.green@dentons.com

FOOTNOTES

1Unless otherwise stated, all references to I.R.C. mean the Internal Revenue Code (26 U.S.C.) of 1986 as amended.

2A proceeding that has already been briefed before this Court is directly relevant to the APA portion of this appeal. See Hewitt v. Comm'r, No. 20-13700 (11th Cir. filed Sept. 15, 2020). The Court's decision in Hewitt is directly controlling of the APA portion of this appeal. Thus, the Appellant's position in this appeal is an abbreviated version of the position set forth more fully by the Appellant in Hewitt. See Brief for Appellant at 24-54, Hewitt v. Comm'r, No. 20-13700 (11th Cir. filed Jan. 28, 2021), 2021 WL 346581; Reply Brief for Appellant, Hewitt v. Comm'r, No. 20-13700 (11th Cir. filed Apr. 22, 2021), 2021 WL 1630584. The Appellant here incorporates the Hewitts' positions in the Appellant's brief and reply brief by reference.

3Pursuant to Eleventh Circuit Rule 28-5, Appellants' brief cites the record as follows: Doc. [#], p. [#], referring to the Tax Court docket number, and the page number assigned to the record by this Court's ECF header because the Tax Court's system did not assign page numbers.

Appellants cite the Administrative Record for T.D. 8069 as follows: “AR.” AR refers to the Administrative Record and page citations that were assigned by The Department of Treasury to the Administrative Record. A copy of the AR was filed as Document No. 23 and spans the entirety of Volume III. Relevant portions of the AR are reproduced in Appellant's Appendix.

4At this point, the IRS had not yet identified what rule (or set of rules) Glade failed to comply with.

5The IRS did not appeal this determination.

6The threshold for the penalty, which requires the return to reflect a 150% overvaluation. This amount was determined by dividing the deduction ($17,504,000) by 1.5. See Op. at *55 (finding the substantial valuation penalty applies if “correct amount” was between $8,752,001 and $11,669,333).

7At trial, Glade contended that it produced credible evidence regarding the deductibility and the Conservation Easement's value, and the burden of proof shifted to the IRS under I.R.C. § 7491(a)(1). The burden should also be on the IRS because it clearly erred in the FPAA by determining that the Conservation Easement's value was “zero.” See Caracci v. Comm'r, 456 F.3d 444, 457 (5th Cir. 2006) (“In a Tax Court deficiency proceeding, once the taxpayer has established that the assessment is arbitrary and erroneous, the burden shifts to the government to prove the correct amount of any taxes owed.”) The Tax Court erroneously determined that the issue was moot because the court “decid[ed] the issues here on the basis of the record and the preponderance of the evidence.” Op. at *2 n.2. The question of which party has the burden of establishing the value of the deduction may be an issue for remand. However, the IRS clearly has the burden of establishing valuation for purposes of the application of penalties. See I.R.C. § 7491(c). The IRS cannot meet that burden without producing any credible evidence on valuation.

8See supra n.2.

9There is no dispute that the Proceeds Regulation is a legislative rule. Oakbrook, 154 T.C. at 190.

10Staff of J. Comm. on Taxation, 96th Cong., Description of Miscellaneous Tax Bills Scheduled for a Hearing Before the Subcommittee on Select Revenue Measures of the Committee on Ways and Means on June 26, 1980, 27 (Comm. Print 1980).

11The IRS blessed such language in a private letter ruling in 2008. I.R.S. Priv. Ltr. Rul. 2008-36-014. It strains credulity that the IRS was unaware of provisions recommended by authoritative sources on conservation easement deed drafting, such as the Conservation Easement Handbook.

12See Nancy Ortmeyer Kuhn, The Eleventh Circuit Court of Appeals: The Current Focus for Conservation Easements, Bloomberg Tax (Apr. 1, 2021) (discussing various unreasonable outcomes of the Regulation as now interpreted).

13Brief for Land Trust Alliance, Inc. et al. as Amici Curiae Supporting Appellant, Rose Hill, 900 F.3d 193 (No. 17-60276), 2018 WL 5087506 at 11-14.

END FOOTNOTES

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